Are Science-Based Targets useful for Dutch companies?

More and more companies are setting ambitious targets for reducing greenhouse gas emissions (especially CO₂) in order to combat climate change. But when do you actually know if you are doing enough? The Science-Based Target initiative (SBTi) offers an answer to this question. Indeed, the initiative presents a method to set CO₂ reduction targets that are in line with what the latest climate studies show to be necessary to meet the Paris Agreement and to keep global warming at least well-below 2°C. Recently, large investors (managed assets close to $20 trillion) called on companies worldwide to do so emphatically, including ABN AMRO, NN Group, Robeco, and Actiam. More than 1.000 companies are now affiliated with SBTi. Is it useful to join this international initiative? What is the added value of setting Science-Based Targets (SBTs)? In Belgium, no less than 53 organizations have recently united in the ‘Belgian Alliance for Climate Action’, committing themselves to do so. Sustainalize researched the experiences and visions of companies in the Netherlands.

In our first blog we already briefly described what SBTs are, but a lot has changed since then. We will therefore first go into the progress of the SBTi, diving deeper into the method in order to contextualize the findings. Then we will discuss our findings, give a step-by-step summary of what needs to be done to set up SBTs, and end with a concluding remark.

The findings are partly based on information provided in interviews with Eneco, Signify, Vodafone Ziggo, Rabobank, Aalberts, NS, KPN, and PostNL, which we would like to thank for their contribution.

Progress of the SBTi
Since the publication of our first blog about SBTs, the popularity of SBTi has increased significantly. At the time of writing, there are 1017 companies committed to the SBTi, of which 529 have an approved target. The number of companies committed to the SBTi has increased since its foundation in 2015, with an acceleration in the last two years, as shown in figure 1. Figure 2 shows that a majority of high-impact companies in developed economies have exceeded the critical mass. This means that SBTs are set to become more common, according to the Diffusion and Innovation Theory (Rogers, 2010). This theory says that as soon as there is enough support for a change or innovation, it rapidly increases in popularity. The Netherlands has already exceeded this critical mass, so rapid growth in companies joining the SBTi can be expected. With the exception of Denmark, there is no country that exceeds 40%, which means that large growth is likely to come.

(Click on image for full size.) Figure 1: Amount of companies that have their targets approved (yellow) and the number of companies that have not yet approved targets but are committed (dark blue). The last bar has been added by Sustainalize, which represents the current situation. At the moment of writing, there are a total of 911 companies that are committed of which 392 have approved targets. Adapted from: Science Based Targets Initiative (2019). Raising the bar: Exploring the science-based targets initiative’s progress in driving ambitious climate action.
(Click on image for full size.) Figure 2: Developed economies that have crossed the critical mass. The theory is that once a critical mass has been achieved, the innovation or change will gain rapid popularity. Source: Science Based Targets Initiative (2019). Raising the bar: Exploring the science-based targets initiative’s progress in driving ambitious climate action.

Methodologies
There are three methods that can be used when setting SBTs. All methods are based on temperature scenarios. The IPCC’s RCP2.6 scenario, which offers a 66% certainty that global warming will not exceed 2°C, and the Beyond 2°C Scenario (B2DS) of the International Energy Agency (IEA) are used for this purpose. The B2DS scenario is similar to the RCP2.6 scenario.

The three methods are:

  • Sectoral Decarbonization Approach (SDA): A ‘carbon budget’ per sector is used to base the emission reduction path on. A carbon budget is the maximum amount of CO₂ that may be present in the atmosphere to ensure less than 2°C global warming. The carbon budget per sector is based on the difference in the reduction potential of different sectors. For example, the energy sector has to reduce more than the metal industry, because there is a greater reduction potential for the energy sector.Within each sector, a company can calculate its own specific targets using the SBTi-Tool (https://sciencebasedtargets.org/step-by-step-guide/ under the heading: Step 2. the science-based target setting tool, or https://sciencebasedtargets.org/transport-2/ for the transport tool).
    Unfortunately, the SDA method cannot be used for every sector. The sectors that can use the SDA method are shown in Figure 3. The SBTi is currently expanding the SDA method for other sectors. The SDA method for the garment, oil and gas, and chemicals and petrochemicals sectors is scheduled to be ready this year. The development of the SDA method for the AFOLU (agriculture, forestry, and other land use) is planned to be ready in Q2 2021.
(Click on image for full size.) Figure 3: Sectors coverd by the SDA method. The sectors combined exceed 60% of total GHG emissions. (Source: IPCC (2014a); IEA (2014)).
  • De absolute reductive method of Absolute Contraction Approach (ACA): With this method, companies can choose to comply with the well-below 2°C path or the 1.5°C path. For the well-below 2°C, there is a linear annual reduction of 2.5%. For the 1.5°C path, there is a linear annual reduction of 4.2%. A linear reduction means that you have to reduce a fixed amount of CO₂, which is determined by the amount of the percentage of your base year. Suppose you emit 100,000 tCO₂ in your base year, then you have to reduce 4,200 tCO₂ (4.2% of 100,000) each year. This results in a linear decrease, instead of a smoothing decrease if you reduce 4.2% of your CO₂ emissions each year (figure 4).
(Click on image for full size.) Figure 4: Difference between the linear annual reduction of 4.2% and an annual reduction rate of 4.2%.
  • The ‘economic approach’ or setting intensity goals: Intensity objectives must always ensure an absolute reduction of emissions in order to be science-based. That is why intensity targets are used most infrequently or are used to assist the absolute targets.

Should I look into it?
So far we have discussed the technical aspect of setting SBTs, but how do companies (that have either set targets or not) view SBTs? Below are the most important positive and negative aspects that have emerged from our Dutch market analysis.

Upsides

  • Having SBTs helps in providing all the information necessary for benchmarks. This can be a clear driver for companies to set SBTs as it is easier to get a higher ranking. In the future, the requirements for a higher score might be sharpened or it might even be mandatory to set SBTs for benchmarks. The CDP questionnaire is already compatible with the SBTi requirements, which makes it easier to fill out the CDP questionnaire and it will likely result in a higher score.
  • It is often unclear what needs to be done exactly to comply with the Paris Agreement. With SBTs your targets are sure to be enough for limiting global warming to at least well below 2°C. It validates when you are doing enough. For instance, some companies claim they contribute to the Paris Agreement but are in fact not doing enough to limit global warming to well-below 2°C.
  • With SBTs everyone speaks the same language, therefore it will become easier to compare targets within each sector and everyone is working towards the same goal.
  • SBTs are a clear dot on the horizon, having a long-term goal offers opportunities to steer your organization towards this goal.

Downsides

  • Not all sectors are included in the SDA method. The SDA method is based on reduction potentials etc. Whereas the absolute targets are set by decreasing a set amount of emissions per year. This results in an increasing reduction percentage. However, in the beginning, it is easier to reduce CO₂ as the saving potential is bigger, over time this might become harder. Thus, it would be better to have all sectors covered in the SDA approach, which takes this into account.
  • Submitting a target to the SBTi implies you must follow their rules. However, for global companies, it might be hard to comply with all. Measuring scope 3 emissions is often quite challenging but is necessary in order to validate your target. Take for example Aalberts, since 2017 they have been measuring and reporting scope 1 & 2 emissions. When filling in the data from 2017 as the base year in the SBTi-tool and check what the suggested amount of emissions needs to be in 2019, they are actually far below it: 323.950 tCO₂ for WB2C or 312.356 tCO₂ for 1.5C compared to Aalbert’s actual emissions of 287.000 tCO₂. Scope 1 & 2 emissions are highly likely to be the main source of emissions given that they are in production. Therefore, they would only have to set a scope 1 & 2 target, for now. When scope 1 & 2 emissions are being reduced, the relative contribution of scope 3 emissions will increase, so it is necessary to cover it in the future, but Aalberts cannot set SBTs now even though they are far below the 1.5°C scenario for scope 1 & 2.
  • The SBTi is still relatively new and needs some explanation internally to the board for instance, or externally in the annual report or to investors. However, according to the progress report of the SBTi, published in November 2019, the critical mass is achieved in most of the developed economies. The critical mass is a threshold value that if overstepped will catalyze change and it will become mainstream. According to their analysis, the SBTi will soon become well known.

What should I do if I want to set an SBT?
It is always useful to hear the opinions of others, but translating them to one’s own situation can be difficult. That is why we have developed a global, step-by-step approach to what it takes to set up SBTs. We are aware that these are very generic points. Therefore, do not hesitate to contact us to further evaluate specific situations.

The first thing to do is to create support within all levels of the organization. When everyone knows why and what is being worked on, it becomes easier to take the necessary measures to reach the goals.

After that, mapping out the emissions is very important. Start with scope 1 and 2 emissions and later also scope 3, because these are often the most challenging. The Greenhouse Gas Protocol offers extensive guidance on how to do this.

The next step then becomes setting a target. A good target takes into account predictions of the future, the growth of a sector, what emissions you may emit at a time in the future, etc. Making these predictions and calculations are very time consuming and often mathematically challenging. Here lies one of the biggest advantages of SBTi, namely that they have already done these calculations for you. The only thing you still have to worry about is making sure that the goals can actually be achieved. This is also time-consuming, but with clear insights into your own emissions, this becomes a lot easier. For example, if you know that the largest emissions of your scope 1 emissions come from your own gasoline cars, then it is easy to calculate how much CO₂ you save if you replace the cars with electric cars, how much these electric cars cost, and how long it takes before all the gasoline cars are replaced.

For scope 3 this will be more challenging because the emissions are in the use phase or in third-party services. Doing Life-Cycle Assessments (LCAs) provide insight into where a product’s emissions occur, after which you can start conversations with production chain colleagues.

Once a target has been developed, the necessary paperwork needs to be done to send your target to – and have it validated by – the SBTi. Reading documents in advance helps to ensure that all steps are taken. In addition, it gives a first impression of what you need to do and where to start.

Once the target has been validated, it is important to monitor progress so that you can intervene if it appears that the expected reduction has not taken place. It is important to keep in mind at the beginning of the process that the target needs to be monitored in the future so that you only have to worry about what to do if something does not go according to plan. This is entirely target- and company-specific, but can be a task for the sustainability department, for example, or outsourced to third parties.

Conclusion
Once SBTs are set, they offer a clear dot on the horizon and validation that your company is acting in line with international emission agreements. Companies that do not yet have an SBT often want this, but find that the methodology does not fit their company or do not have enough insight into their own emissions (especially scope 3).

Insight into their own scope 1, 2 & 3 emissions, combined with support within all organizational levels, is necessary. It is expected that governments will introduce stricter legislation on emissions in the future. In addition, an SBT can also help improve the competitive position. Some examples of more climate-related measures:

Japan is the first country in which the government recommends companies to set SBTs.
Canadian companies that request financial support due to the economic impact of COVID-19 must comply with the standards set by the Task Force for Climate-Related Financial Disclosure (TCFD).
155 companies with a total market value of more than $2.4 billion and more than 5 million employees have signed a statement that governments around the world should align their COVID-19 financial support with climate science.

The examples above show that more focus on emission reduction is inevitable. Insight into one’s own emissions is very important when setting realistic targets. A good way to check whether your targets are sufficient to meet the Paris objectives is to have this verified by an independent party. This makes you a sustainable frontrunner, which you can communicate internally and externally. It can contribute to a higher score on various benchmarks and contributes to the future resilience of an organization.

Author: Gavin de Jong, in coördination with Kyra Weerts.

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